Horror week for the rand

The rand endured its worst week so far, shedding more than 5% in value and making imports more expensive, threatening the already stubborn inflation that has seen interest rates rise to the highest in 14 years.

The local currency, known as one of the most volatile emerging markets currencies in the world, rallied last month, gaining more than 7% against the US dollar.

The strength of the domestic currency was on the back of reduced loadshedding, which allayed fears of a grid collapse and news that Russia’s President Vladimir Putin would not attend the much-anticipated BRICS summit, easing pressure on Pretoria that it might face hostilities from its biggest trade partners in the European Union and the SA.

The rand’s strength last month was also due to the decision by US Trade and Development Agency to award Eskom a grant to fund technical assistance, implying that the relationship between the US and SA is salvageable and South Africa might not be kicked out of AGOA.

However, the rand this week reversed all gains and had the worst start imaginable to August.

The rand backtracked from R17.60 against the greenback to R18.63 on Friday – the sharpest depreciation so far this year.

Nolan Wapenaar, co-chief investment officer at Anchor Capital, said the decision by rating agency Fitch to downgrade America’s credit rating sparked outflows in emerging markets, with the rand bearing the brunt of the fallout.

“Fitch is the second major rating agency after Standard & Poor’s to take away the US triple-A credit rating. A strong US economy based on GDP and jobs data has traders speculating that we might see another rate hike in September. It is difficult to pinpoint what sparked the risk-off shift, however, while this sentiment persists, the rand will remain on the back foot,” Wapenaar said.

“We do not think the risk-off sentiment or the movement in the local currency is justified on fundamentals, and we are looking to take advantage of this.”

The rand is important in influencing the South African Reserve Bank monetary policy in decision to hold, decrease or increase interest rates.

The central bank last month kept its key repo rate unchanged at a 14-year high of 8.25%, pausing its tightening cycle after 10 consecutive hikes. However, Reserve Bank governor Lesetja Kganyago warned the decision did not represent the end of the
hiking cycle.

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